"By the Law of Periodical Repetition, everything which has
happened once must happen again, and again, and again -- and not capriciously,
but at regular periods, and each thing in its own period, not another's,
and each obeying its own law... The same Nature which delights in periodical
repetition in the sky is the Nature which orders the affairs of the earth.
Let us not underrate the value of that hint." ~ Mark Twain

Current Position of the Market

SPX: Very Long-term trend - The very-long-term cycles are in their
down phases, and if they make their lows when expected (after this bull market
is over), there will be another steep decline into late 2014. However, the
severe correction of 2007-2009 may have curtailed the full downward pressure
potential of the 40-yr and 120-yr cycles.

Intermediate trend - An important top formation may be in the making.

Analysis of the short-term trend is done on a daily basis with the
help of hourly charts. It is an important adjunct to the analysis of daily
and weekly charts which discusses the course of longer market trends.

Daily
market analysis of the short term trend is reserved for subscribers. If you
would like to sign up for a FREE 4-week trial period of daily comments, please
let me know at ajg@cybertrails.com.

START OF AN INTERMEDIATE DECLINE, OR...?

Market Overview

The indicators did not lie! Since the end of December, they have been pointing
to the formation of a top. After a 3-day decline of 34 points from 1813, SPX
had a rally which stopped just short of producing a new high. Last week, this
was followed by another decline of 40 points with the index closing near its
low of the move after meeting the 1773 projection target.

In the previous letter, I suggested that, in order to get a confirmed intermediate
sell signal, two things needed to happen: 1) SPX needed to close below 1777
and 2) the A/D would need a daily close of at least -1800. Both of these requirements
were met on Thursday ... just barely! On Friday, the index could not follow
through on the downside, but only traded in a narrow range.

My expectations are that we started a decline which is probably that of primary
wave IV, with the correction lasting into February. But I would like the confirmation
of an intermediate decline to be just a little more conclusive as there are
other factors which contribute to some uncertainty: the 8-week cycle which
ostensibly caused the current decline was expected to make its low either Friday
or Monday, we are about to enter one of the most bullish periods of the year
and, on the Point & Figure chart, it looks very much as if SPX has started
to form a base from which to start a rally. So far, that base is not extensive
enough to take us to new highs, but if this pattern extends for another day
or two, we will have to take another look at such a possibility.

The best way for the uncertainty to resolve itself would be for the decline
to continue into next week. This is a possibility since another (but weaker)
cycle bottom follows the 8-wk cycle and is due toward the end of next week.
If it were to continue pressuring the SPX, it could move it down to the next
projection level which is several points lower.

Next week should clear this up.

Chart Analysis

The daily chart (courtesy of QCharts) shows that the SPX stopped its
decline at the bottom of a short-term channel and at the intersection of several
internal parallels, all of which, together, create enough support to arrest
it, at least temporarily. There is also a sizeable congestion level which was
formed by the 1775 high which is now acting as support. The current pull-back
has come to rest on the very top level. This will make it difficult for the
correction to extend beyond this price band right away.

The oscillators are mixed. The MACD is in a decline and has just broken an
uptrend line, but it is still positive. SRSI is oversold and flat, and the
A/D oscillator has turned up after making a new low, but has not yet made a
bullish cross. Collectively, they also reflect a period of hesitation in the
downtrend which could quickly evolve into their being in a position to give
a buy signal.

The hourly chart (also courtesy of QCharts) shows that the oscillators
have profited from the pause in price to turn up, but they are also mixed.
SRSI and A/D are already in uptrends and have turned positive, but MACD is
still very oversold and in a longer-term downtrend which may curtail any price
rally that may develop from this level.

The chart also shows clearly the support level which coincides with the internal
parallel lines around this area. It will take a fair amount of additional weakness
to drive prices through all that. Note that SPX has fallen below its 200-hr
MA but not far enough so that it cannot be surpassed once again on any attempt
at rallying.

The combined daily and hourly charts illustrate the uncertainty about the
direction of the next short-term trend and it will take a few more days of
trading to sort it out.

Cycles

The downtrend of the 8-wk cycle is just about exhausted and it may even have
made a low on Friday. There is another 35-td cycle whose low is due this week
which could prolong the decline if it can muster enough downside pressure on
the index.

Intermediate cycles which are due in February and long-term cycles due next
October could continue to exert downward pressure on the market until both
short-term cycles have turned up and can provide a temporary rally.

Breadth

The McClellan oscillator has drifted a little lower, but not enough to confirm
that an intermediate decline is in progress. If you look back to June and August,
the troughs of the indicator are far lower as a result of much more intense
selling. Until this occurs, the decline may remain fairly shallow.

NYSI-- which is more reflective of the intermediate term -- on the other hand,
has already dropped below its October low and this has produced serious negative
divergence in that index. Here, there is less doubt that we have started something
more than a short-term decline, but SPX could still generate a rally over the
next two or three weeks before dropping lower.

Sentiment Indicators

After several weeks with a reading of 70, the SentimenTrader (courtesy
of same) has dropped back to 60. This is still an elevated reading which is
by no means suggestive that we should already expect an end to the correction.

VIX

During the recent decline VIX made the same half-hearted attempt at breaking
out that the way it did in the previous one. The pull-back in prices went slightly
lower, and VIX went slightly higher. But this only augments the sense of uncertainty
about the market's direction. VIX tends to reflect the mood of the market and,
at this time, it shows the same degree of complacency which has prevailed for
the past six weeks.

IWM was making a bearish wedge pattern which has resolved itself to the downside,
as it should have. However, the correction is clearly a-b-c and, unless it
adds one more down leg, this will turn out to be another short-lived retracement.
Hope for more to come resides in the MACD which is still down-trending with
no sign of deceleration.

BONDS

As pointed out in the last newsletter, bonds are caught up in a lethargic
trend which is going nowhere. The positive divergence which has developed in
the MACD is pointing to a potential holding or rallying in the near future.
However, the potential for a dynamic reversal of the trend is still nowhere
apparent.

GOLD (ETF for gold)

After a meager attempt at rallying, GLD has quickly moved back down. It is
now engaged in finding a price level that will mark the bottoming of its 25-26
day cycle which is scheduled to make its low over the next few days. If GLD
manages to hold its former low during this process, it will be in a better
position to start a good reversal which could go and challenge the top of its
long-term down channel.

UUP (dollar ETF)

The dollar may have found support at 21.50 and be preparing to turn up from
this level. However, the proximity of the 25/26-wk low in gold could affect
it adversely, limit its upside potential and cause it to continue its downtrend
after only a short rally.

USO (United States Oil Fund)

Last week, I mentioned that USO might have a problem following through on
its upward spurt. This has proven to be the case and the index is now engaged
in retracing its move. It could lead to more of a rally later on, but the long-term
chart argues against anything of substance.

Summary

Perhaps the best way to define SPX's options going forward is to present them
in structural terms.

There is a good possibility that primary wave III of the move from 10/11 ended
at 1813 and that primary wave IV has started. This is made more probable by
the expectation that an intermediate downtrend which will last into the February
cycle lows. On the other hand, the current pattern could also be viewed as
a large a-b-c correction which ended at 1772.

Confirmation of either possibility will come if the next rally makes a new
high, or fails to do so. We are entering what is probably the most bullish
period of the year and the hourly chart, particularly, points to the possibility
that the decline has been arrested and that the oscillators are gearing up
to give a buy signal. The market action into early January will provide more
clarity about the overall trend.

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The above comments about the financial markets are based purely on what I
consider to be sound technical analysis principles uncompromised by fundamental
considerations. They represent my own opinion and are not meant to be construed
as trading or investment advice, but are offered as an analytical point of
view which might be of interest to those who follow stock market cycles and
technical analysis.